Party Like It's 1995

The long-term history of the stock market is one of unqualified success.

Investing in stocks consistently over the last hundred years has been a recipe for success, and in the last few decades, it has been even better.

At this point, we must acknowledge this is not a fluke or a temporary phenomenon.

Investing in US stocks for the LONG-TERM is a great bet!

Despite this long-term history of success, skepticism always remains high. Periods of loss leave much more of an emotional impact than lengthy periods of success.

As the old stock market saying goes – “Bull markets climb a wall of worry.”

We have been thinking about this recently as we have considered the possibility of the Federal Reserve Bank cutting interest rates.

Coming into 2024, the expectation was that the Fed might cut rates multiple times—as many as half a dozen.

This was to be part of the “fuel” behind the current stock market run. A series of rate cuts would help both the economy and company earnings.

As we have progressed through 2024, though, the US economy and inflation have remained stronger than anticipated. This has decreased expectations for rate cuts.

Now, the markets are "pricing in" only one or two.

Despite this change in outlook, the stock market has had a great start to the year. Through last Friday’s close, the S&P 500 was +16.7%, and the NASDAQ Composite was +22.3%.

Although many observers criticize the market as being led by just a few stocks, the fact is that these are great returns.

This raises an interesting question: Is the Federal Reserve likely to cut rates at all with the stock market at all-time highs?

Factually they HAVE cut rates with the stock market at all-time highs. In fact, they have done it 20 times since 1980; in each case, the S&P 500 was higher a year later.

There must not be something "broken" for the Fed to cut rates.

As we discussed in a note earlier this year (read it here), during the mid-1990s, there was a period where the Fed did not engage in drastic cuts or raises. Instead, they adjusted for several years.

Here is the Fed Funds rate chart from 1994 to 1999…

This was the period when we started our career.

You can see that back in 1994, the Fed engaged in a series of rapid rate increases to cool off the economy.

They then stopped in early 1995 and cut rates a few months later. Not a lot, but there were a small number of rate cuts.

Like 2022, 1994 was a challenging year for the stock market. The S&P 500 total return was -1.5%. It was not terrible, but it felt a lot worse at the time.

The stock market took off at the start of 1995, though. In the first half of that year, the S&P 500 was +20% and reached new highs.

Despite the new highs, the Fed still cut rates 25 basis points in July and then another 25 basis points in December.

The economic data was still mixed, but the stock market was soaring. Sound familiar?

Eventually, the Federal Reserve would be judged to have accomplished the rarest of outcomes—a "soft landing." They successfully cooled down the economy without plunging it into a steep decline.

How did 1995 end for the stock market? Pretty darn well!

The total return that year was +35% or one of the best years for the S&P 500 in the last thirty years. That is the best year since 1958!

Here is a chart showing the 1995 S&P 500 versus the 2024 S&P 500 year-to-date…

Looks similar!

We would also note that in 1995, the S&P 500 made 77 all-time highs. So far, in the first half of 2024, it has made 29 of them.

There are no guarantees in the stock market, but we think the data lines up nicely. Even if we don't see the same kind of performance as 1995, we still believe we can go higher!

Stick with the stock market here and enjoy the ride…